Partnership Definition
A general partnership definition is "two or more people that have agreed to engage in business practices for the purpose of profit." Properly forming a partnership will require that the following is met:
- The partnership includes two or more people
- All partners agree to any liability that their partnership may face
- Proof that an agreement is made
It is possible for you to form a partnership orally, but oral partnerships do not provide proof that will be necessary if any legal consequences are faced. Instead, a Partnership Agreement should be used to clearly define a partnership.
We offer a template that allows you to prepare a Partnership Agreement.
General Partnership Liability
One of the major concerns when starting a partnership is that there is little protection for the owners of the business in terms of liability. When you create a general partnership, all partners are taking an equal share of duties as well as liability.
If, while in the course of business pertaining to the partnership, one of the partners engages in a wrongful act, all partners will be held liable.
Financial Liability
Financial debts and responsibilities will be the responsibility of you and your partner(s). Since there isn't a new entity formed with a general partnership, all partners will be held liable for debt incurred during the course of the business' operation.
Taxes will not flow through a partnership. Instead, all partners will be responsible for taxes including any money earned through the partnership on their own personal taxes. Only the percentage of your profits earned will be calculated on your taxes.
Forming an Agreement
As stated in the partnership definition section, an agreement is preferable when forming a partnership. This is a legal document that will act as proof that a partnership exists and will act as a guideline for partnerships to follow.
Every Partnership Agreement is different, but you may want to consider including the following information within your agreement:
- Partnership name and address
- Names of all partners
- Effective date and purpose of the partnership
- Voting requirements for business decisions
- Costs, based on percentage, of each partner
- Sharing of profits
- Information pertaining to financials, auditing and profits
- Required contributions of any partners as well as deadline for the completion of contributions
- What procedures to follow if a partner withdraws from the partnership
- What procedures must be taken to dissolve the partnership
An agreement acts as your guideline of rules that must be followed by your partnership. Generally, you will not have to file any paperwork with government agencies to form a partnership. Local business registrations will need to be made as well as obtaining any licenses or permits required by your state to operate legally.
Your partnership may also need to operate under a registered fictitious business name.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
